Ramsay Health Care

About the author:

Dr Derek Jellinek
Author name:
By Dr Derek Jellinek
Job title:
Senior Analyst
Date posted:
24 February 2017, 8:33 AM
Sectors Covered:
Healthcare

Key points

  • The 1H underlying results for Ramsay Health Care (RHC) were solid and in line, underpinned by broad divisional performance and expanding group margins.
  • Despite industry volatility, domestic admission growth remains solid and is tracking to the long term average (c5%).
  • CEO Christopher Rex surprised the market by announcing his retirement this year, but we are confident that RHC will remain on track.  

Earnings growth across all divisions

1H16 results were solid and broadly in line, with core NPAT up 12.8% to A$267.8m (Morgans est. was A$266m) on product revenue of A$4,319m (+3.5%). Underlying EBITDAR was strong, increasing 5.4% to A$841.1m, with margins expanding 36bp to 19.5%. All core divisions contributed to earnings growth, but Australia/Asia stood out for underlying margin uplift, mainly on procurement benefits.

FY17 guidance was upgraded with NPAT and EPS growth of 12-14% (previously 10-12%).

Australian performance helped by admissions growth and procurement benefits

Reassuringly, the domestic business is seeing volume growth at historical levels (c5%), despite "volatility during a couple of months". Taken with price/mix leverage, we believe the business should continue to experience solid growth. In fact, we see upside with the procurement strategy, with more than A$40m in savings expected this year (adding an estimated c40bp to 1H margins).

Ramsay Pharmacy – adding to margin uplift

The establishment of a network of retail pharmacies is rapidly advancing, with 22 sites in the portfolio (1.4% contribution to Australian growth; A$30m revenue, cA$4m EBIT). With c60 sites targeted before the end of FY17, a material jump is expected in FY18, with significant opportunities to expand services over the medium and longer term.

CEO to retire – a loss, but the course is set and the fundamentals are sound

The announcement that CEO Christopher Rex will be retiring this year for personal reasons caught the market by surprise. An exceptionally competent leader, Mr Rex will certainly be missed, but the company is "bigger than any individual", and RHC has a strong management team and a solid strategy in place. We are confident that the guided succession plan will help the organisation remain on track. 

Ramsay Health Care (RHC) has a stable core business underpinned by unwavering fundamentals and opportunities for growth. We retain our Add recommendation with an upgraded share price target.

More information

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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